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High Chinese EV Sales Are Not Evidence of the Success of Tariffs or Industrial Policy

Here’s a letter to a new correspondent:

Mr. W__:

I’m not on Twitter so I missed Brad Setser’s twitter thread of last month in which he wrote that “Tariffs don’t work is (it seems) a fairly common response to the 301 review increase in US EV tariffs. The thing is, well, China’s auto export success is the best counter example to that …. So imo anyone who offers a simple ‘magic of the markets’/ ‘tariffs never work’/ ‘industrial policy never works’ story should start from a big disadvantage, because China’s EV story is a story of a successful industrial strategy/ policy.”

With respect, I disagree with your conclusion that Setser’s thread is “a home run against market fundamentalism.” Setser here scores points only against a strawman.

No competent proponent of free trade has ever denied that sufficiently high tariffs or subsidies (or mixes of both) often enable protected firms to sell, behind walls of protection, plenty of output and to achieve substantial market share. Nor do free-trade proponents deny the possibility that such protection or subsidization can, in some cases, actually create for privileged industries comparative advantages that these industries would otherwise have not achieved.

A key part of the economic argument against tariffs and industrial policy is to note that when government creates the conditions for protected firms to thrive and expand it necessarily draws resources away from other domestic industries, thus causing these other industries to weaken and shrink. Setser looks only at the positive consequences of protection and ignores the negative consequences that are a star attraction in all serious analyses of protectionism.

Setser’s argument in favor of protectionism is the equivalent of an argument in favor of pickpocketing in which a proponent of pickpocketing, upon observing a successful pickpocket, criticizes as naive those persons who argue that legalized pickpocketing makes the people of the country poorer, not richer.

It’s ironic, by the way, that you share Setser’s tweet with me today, which is the 223rd anniversary of the birth of Frédéric Bastiat. Bastiat famously and quite correctly insisted that sound policy judgments can be made only if people take account not only of that which is seen, but also of that which is unseen. Setser ignored the unseen.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030